China’s growth is much worse than it admits – but that doesn’t matter

published 19 October 2015

151019-china — China's economy is worse then the government will admit, but will get better

Now there's a surprise China's GDP was better than anyone expected. It came in at 6.9% for the third quarter; below the 7% seen in the first half of the year, but better than economists had expected.

And if you'll believe that, you'll believe anything.

It's nonsense, of course. China has some of the most suspiciously stable GDP data around, because the government needs a headline figure it can point to and argue that all of its plans are working perfectly. Real growth is much lower.

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So that means we shouldn't touch it with a ten-foot bargepole, right?

Wrong

Sceptical about Chinese GDP data? You should be

That's just the way these things work. As Mark Williams at Capital Economics puts it: "GDP growth is a high-profile policy target that is seen as a key metric of whether the leadership's economic policies are working".

In a dictatorship (and while it's on the cuddlier' end of the spectrum than some, that's exactly what China is, and we'd do well to remember it), if a target reflects on the leadership, then it won't be missed. And given that the Chinese economy has been in slowdown mode since 2012, the data has become steadily more detached from reality since then.

However, the good news is that other data isn't as fiddled as the GDP figures are. As Capital Economics and several other forecasters have twigged, you can look at the "wide range of low-profile data" that China releases to get a better idea of the real' picture.

So what is the real picture? Well, Capital reckons that growth went from an annual rate of 5.5% in the last quarter of 2014, to 4% in the first quarter of this year.

That's a hefty slowdown. And it's a lot slower than the official figures. But here's the good news.

The good news about China

As I mentioned already, China has been slowing down for a long time we've been writing about it since at least 2012. And yet it's only really this year and last that the implications of that started to make themselves felt in the markets.

Collapsing commodity prices, poorly-handled interventions by the Chinese government and sliding emerging markets suddenly everyone woke up to the Chinese hard landing' and started to panic.

But now a hard landing has arguably been priced in. So if we get to the stage where things are bad, but getting better, then markets should find some room to rally. And that's what we're seeing.

Capital reckons that growth stabilised in the second and third quarters of this year, to around 4.5% year-on-year. And as Julian Evans-Pritchard puts it: "Today's data suggest that while the official GDP figures continue to overstate the actual pace of growth in China by a significant margin, underlying conditions are subdued but stable." Meanwhile, "stronger fiscal spending and more rapid credit growth will limit the downside risks to growth over the coming quarters."

In short, things are bad, but they are stabilising and likely to get better from here. That's something that the market has only just begun to wake up to.

It'll be interesting to see how China deals with the potential default of state-owned miner and steel trader Sinosteel this week. As the FT reports, the company warned investors last week that "its subsidiary lacked the funds to repay principal and interest on $315m in bonds sold in 2010 due on Tuesday".

It would be good to see Sinosteel being allowed to default. That would suggest that China is serious about market reform. However, judging by the past, it's highly unlikely. That's not a great sign for the long run, but China's hardly the only global power that remains wedded to the politically convenient bailout.

For example, as we've already noted, over in the US the Federal Reserve seems to have entirely lost its nerve when it comes to the prospect of raising interest rates. And that's another reason to be more optimistic than most on prospects for China and other emerging markets. A weakening dollar effectively means looser global monetary policy and will take a lot of the pressure off these markets.

A few weeks ago, our roundtable experts looked at ways to play a Chinese rally and a slowdown in the dollar's bull run, in MoneyWeek's cover story. That's exactly what's playing out just now, but it's not too late to get on board.

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John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.